Some earnings have surprised on the upside: Forsyth Partners

The Head-Offshore Equity Analysis at Forsyth Partners, Ms Jacqueline Aldhous, believes that the Indian markets are at an all-time high and that some earnings have surprised on the upside.

She also states that there is a lot of risk in terms of competitive pressures and wage growth. In terms of relative value, although there have been some winners in the large-cap space, she feels that mid-caps have under performed this year and they offer relative value.

How have you read the earnings that India has posted so far? What is your call on Sensex at these levels?

Obviously, it is at an all-time high and some earnings have surprised very much on the upside. I think from here, it is very important to look at where earnings go from here.

Obviously, we have got quite a lot of risk in terms of competitive pressures and also in terms of wage growth. A lot of companies are keen to keep staff rather than have high levels of attrition and so mostly the earnings have been positive. The managers I speak to, because I invest in a lot of domestic mutual funds, basically are really drilling down and looking at the earnings pressure, the earnings visibility and also sustainability of earnings, I really think that the view is that there will be very strong winners and there will be losers.

So for example, in IT, they are looking at large companies such as Infosys and Wipro. Since some of the smaller players face more competitive pressures, companies such as Infosys and Wipro will be major global winners. I mean they already are, but they will grow in strength and some of the smaller ones will suffer.

So I think from here, it really is very company-specific. I think there are some sectors, which do have better margins. They have less pressure, so there may be areas such as media, capital goods, cement, consumer related and some of the IT services and telecom where there has been very strong subscriber growth. Some of the auto companies like Bajaj Auto do not really have these competitive pressures. Although they had good volume growth, they had pressures on their operating margins due to the fact that they had to discount.

What has been reported what is the call on market? Are you overweight at this point and anecdotally have you heard of more cash being deployed after the earnings that have come out so far?

I think what's happening in terms of FII even with the collapse in May, I think what was surprising was that FIIs didn't completely exit the market and have a huge panic. Obviously, there was a lot of speculation, there was lot of hedge fund activity. So, a lot of the May scenario was caused by margins and a lot of FII money actually stuck there.

Anecdotally, when I speak to big institutions across Europe and UK, one senses that they are still looking at allocating money to India. They are very slow in changing their asset allocation and on a long-term basis, they think that it still a long-term story. It's very hard to call now. I know a lot of people are thinking it has had this great recovery and has even gone to new highs from May highs and June's low.

But on a long-term basis, it isn't a question of whether it will go to 15,000 it's a question of when it will go to 15,000 really. I think there is a lot of confidence that there is very strong momentum in the market. Once there are changes that are on the scales of India, then it does have its own momentum. Obviously, there is a burgeoning consumer, obviously a lot of infrastructure as well.

Some of the power projects can add 1 per cent to GDP. So that's a really strong belief from external investors, i.e. FIIs that it is a very strong story. You cannot time it, it is very hard, obviously 9,000 was very reasonable. Then there was a phase where it could go below that. But there is a feeling that although it is not cheap, it still has a kind of momentum or we may see 10-15 per cent correction. But over the long-term, it is still not feasible.

(This article was published in the Business Line print edition dated October 24, 2006)

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